Five challenges Urjit Patel will face as the new RBI governor

Urjit Patel, Reserve Bank of India (RBI) deputy governor, will take over as the central bank’s new head, ending two months’ speculation about Raghuram Rajan’s successor.

businessUpdated: Aug 20, 2016 18:50 IST

Gaurav Choudhury

Hindustan Times

Urjit Patel, Reserve Bank of India (RBI) deputy governor, will take over as the central bank’s new head, ending two months’ speculation about Raghuram Rajan’s successor.(AFP Photo)

Urjit Patel, Reserve Bank of India (RBI) deputy governor, will take over as the central bank’s new head, ending two months’ speculation about Raghuram Rajan’s successor.

Patel’s appointment can bring continuity to monetary policy in the country. He was Rajan’s deputy when he had repeated face-offs with the political establishment for ignoring calls to cut interest rates. Rajan told the government in June that he will return to teaching.

Rajan’s successor will have to ensure seamless transition to the new system.

3) RUPEE and FCNR

The rupee, currently hovering around 67 to a dollar, could take knock in the next three months. A spurt in dollars outflows are expected during September and November as depositors withdraw money parked in foreign currency non-resident (FCNR) deposits.

Banks had raised these funds through specially created three-year FCNR schemes in 2013 to shore up dollar supplies and arrest the rupee’s slide that had slumped to a record low of 68.80 in August 2013.

These deposits are now due for redemption between September and November.

The central bank expects about $20 billion to be withdrawn from these special FCNR deposits. The resultant demand for dollars could depreciate the rupee’s value.

The new RBI governor will have to quickly find ways to deal with likely volatility in currency markets.

4) NEW DIGITAL BANKS

A string of digital payments and small finance banks will start operations in the coming months.

A payment bank is a differentiated bank that is allowed to carry out restricted banking functions. Payments banks can collect deposits, but cannot lend. These institutions are primarily aimed at giving access to formal banking services to those at the lower end of the income scale and also in remote areas.

The RBI gave out in-principle licences to 11 applicants in August last year. With 18 months, three have given up their licences.

The RBI has also granted in-principle approval to 10 applicants to set up small finance banks. Small banks can perform all activities similar to commercial lenders, though on a restricted scale, payments banks cannot undertake lending operations.

Screening of applicants and selecting serious players is less than half the battle; use of technology to allow the poor to transfer money, at a low cost, is a big task.

The RBI under the new governor will have to learn to regulate these new-age banks.

5) MANAGING POLITICAL RELATIONS

Rajan had repeated run-ins with the political establishment, for steadfast focus on taming inflation.

Rajan’s tenure has been marked by the policymakers’ dilemma to balance growth with price stability.

Shunning calls from industry and Parliamentarians to cut interest rates, Rajan has bluntly said his mission in the RBI headquarters in Mumbai’s Mint Street, is not attracting Facebook `likes’.

The Chicago University professor, well-known for the foreseeing the impending financial crisis of 2008, did acquire a rock-star status of sorts among certain sections of India’s educated middle class for not hesitating to public air his views on a raft of non-economic matters.

The new governor will have to live up the reputation of fiercely protecting RBI’s autonomy and show the ability to withstand mounting political pressure that could arise during the course of the central bank chief’s tenure.